Philippines: Country Profile Country Profile | 29 May 2015

The economy will slow in 2015 but still grow at a healthy pace. Support comes from lower commodity prices, higher public spending and steady gains in both private consumption and exports. Risks include a prolonged slowdown in Japan and China - the Philippines' biggest trade partners. The economy faces serious gaps in infrastructure but delays in Manila's public-private partnership programme prevent implementation. Annual rates of economic growth should be around 6.0% in the medium term.

KEY POINTS

� Real GDP should grow by 4.9% in 2015 after gains of 6.1% in 2014. Positive factors include lower commodity prices, higher public spending, and steady gains in both private consumption and exports. Risks include a prolonged slowdown in Japan and China - the Philippines' biggest trade partners.

� The Philippine economy suffers from yawning gaps in infrastructure. Delays in Manila's public-private partnership programme prevent implementation of many projects. Institutional investors complain that a handful of dynastic local family groups secure the bulk of PPP contracts. This is part of the reason why inflows of FDI are lower than in neighbouring countries.

� Unemployment was 6.6% in 2014 and it will drop to 6.3% in 2015. Underemployment, however, is nearly 20% and more than 40% of the employed work in the informal sector. The country must generate about 800,000 jobs annually to absorb new entrants.

� Plans for public spending should ensure that real GDP will grow by around 6.0% per year in the medium term. A danger is that the government will not fully implement all its spending targets owing to bureaucratic obstacles.

Chart 1 Real GDP Growth and Per Capita GDP: 2009-2015

Source: Euromonitor International from national statistics/Eurostat/OECD/UN/IMF

Note: Data for 2014 and 2015 are forecast. GDP per capita are in constant 2013 prices

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FACTS

Area

298,200 square kilometres

Currency

Philippine peso (Ps = 100 centavos)

Location

Composed of 11 large islands and some 7,000 smaller islands and atolls, the Philippines lies some 800km off the coast of Indo-China, north-east of Papua New Guinea and north of Indonesia. The group of islands is some 900km in length from north to south.

Capital

Manila

GOVERNMENT

Head of State

President Benigno "Noynoy" Aquino (2010)

Head of Government

President Benigno "Noynoy" Aquino (2010)

Ruling Party

The government is led by the Liberal Party.

Political Structure

The Republic of the Philippines has an executive president who is elected for a six-year term by universal mandate and then appoints a cabinet. Congress has two chambers. The House of Representatives has 292 members elected for a three-year term (of whom 80% are directly elected and 20% are selected from party lists). The Senate has 24 members, elected for a six-year term by proportional representation, half of them renewed every three years.

Last Elections

Presidential elections were held in May 2010. Noynoy Aquino took 42% of the vote, defeating eight other candidates. Elections to the Senate and House were held in May 2013. In the Senate, the United Nationalist Party now holds 5 seats as does the Nationalista Party. The Liberal Party holds 4 seats and the National Peoples' Coalition has 2 seats. Independents have 3 seats and the remainder are scattered among several smaller parties. In House elections, the Liberal Party coalition took 113 seats while the United Nationalist Coalition gained 10 seats. The Nationalist Peoples' Coalition received 43 seats and independents won 6 seats. The remainder went to several smaller parties.

Political Stability and Risks

In March 2014, the government signed a comprehensive peace agreement with the Bangsamoro, or Moro nation. The agreement is a plan for establishing stability in

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Muslim areas of Mindanao. The army is also fighting the Abu Sayyaf Jihadist group and other Muslims elsewhere in the country. Peace talks have been stalled for several years.

In July 2014, the Supreme Court declared partly illegal a US$3.3 billion economic stimulus fund that the president created in 2011 from budget savings. The decision is slowing public spending and has hurt Aquino's reputation.

International Issues

In 2016, the ASEAN Economic Community (AEC) will be officially launched. The organisation should give ASEAN members (including the Philippines) a greater role in regional and global economic affairs.

The Philippines claim the Malaysian territory of Sabah which, it argues, was illegally ceded to the new Malaysian state by Brunei. The dispute has been dormant since the late 1970s, however. The Philippines also claims the Spratly Islands in the South China Sea, where oil prospecting has been in progress.

Government Finance

Public debt in 2014 amounted to Ps4,712 billion. At that time, it represented 37.3% of GDP. In real terms, public debt rose by 0.2% in 2014. The authorities are under some pressure to accelerate the process of debt reduction. Measures to trim the public debt include tighter oversight of government-controlled firms with large liabilities and greater reliance on domestic capital sources.

The budget deficit has ranged between 2.0% and 2.6% of GDP in recent years. Officials intend to hold the deficit to about 2% of GDP in 2015 despite additional spending related to the earthquake and Typhoon Yolanda which hit in 2013.

In 2014, 43.5% of government expenditure went towards general public services followed by spending on education (16.3%).

Chart 2 Public Debt: 2009-2014

Source: Euromonitor International

Note: Data are in constant 2014 prices

ECONOMY

Economic Structure and Major Industries

Agriculture employs 32.8% of the workforce. The sector's historical rate of growth

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is only about 3% per year but officials hope to double that over the next decade. The Philippines is the world's largest importer of rice but Typhoon Yolanda destroyed almost one million metric tons of the wet-season rice harvest in November 2013. Rice imports will be increased to rebuild stocks. Agricultural output barely meets domestic demand. Problems associated with El Niño conditions could result in a poor harvest in 2015.

Manufacturing accounts for 20.3% of GDP and employs 8.6% of the workforce. The country provides about 10% of the world's semiconductor manufacturing services, including for mobile phone chips and micro-processors. Semiconductors account for about three-fifths of exports. The Philippines has also overtaken major rivals such as India as a global hub for business process outsourcing (BPO) - call centres, accounting and information technology support. BPO operations employ more than 1 million people and its revenues are approaching US$20 billion. Manufacturing output rose by 5.8% in 2014.

The service sector accounts for 57.1% of GDP and is performing better than other parts of the economy. The sector is driven by real estate, financial services and business process outsourcing. More than 600,000 are presently employed in call centres and related activities. The real value of tourist receipts grew by 3.2% in 2014 and gains of 6.6% are expected in 2015. Manila hopes to lure gamblers away from Macau with several huge new casinos that are under development. Gambling revenues are predicted to rise by at least 20% per year through 2018.

The Philippines has valuable mineral deposits of copper, gold and chromate. High metal prices continue to attract foreigners' interest. Total investments are projected to reach US$18 billion by 2016. Seven major projects are expected to boost mining output over the next several years. In 2012, the president signed a new mining policy aimed at quelling concern over environmental damage. The new policy is also designed to raise government revenues from mining, bringing in up to US$12 billion over the next five years. The real value of mining output rose by 11.9% in 2014.

Overview of the Economy

The Philippine economy grew strongly in 2010 but the pace of growth eased somewhat in 2011 owing to a fall in semiconductor exports and a temporary drop in public investment. In 2012, real GDP rose by 6.7% as buoyant investment, particularly in construction, and robust consumption propelled the economy. Remittances also soared. In 2013, real GDP growth was 7.1% despite a major earthquake and the effects of Typhoon Yolanda. The economy was driven by strong gains in consumption and services, and supported by investment in manufacturing. In 2014, the pace of growth dipped to 6.1% but this was still one of the best performances in the region. The main drivers were private consumption, higher investment and strong gains in exports.

The Philippines is a major supplier of workers to other parts of the world. The main reason for the continued exodus is the many Filipinos who live in poverty. More than a quarter of all Filipinos lived in poverty in 2012. Manila's Development Plan aims to cut the poverty rate to less than 20% by 2016.

Foreign Trade

Exports remain an important contributor to growth but their share in GDP has

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declined in recent years. In 2014, exports represented 21.8% of GDP, down from 28.3% in 2008. Exports (in dollar terms) rose by 9.7% in 2014 and an increase of 4.8% is expected in 2015. Port congestion continues to be a problem for exporters. Implementation of the ASEAN Economic Community by the end of 2015 could provide a boost to exporters in the medium term.

Machinery and transport equipment accounted for 54.8% of all exports in 2014. Other important exports include garments, wooden products and petroleum products. In 2014, most of the Philippines' exports went to Japan (22.9%), the USA (14.1%), China (13.0%) and the EU (10.9%). A problem for the Philippines is that most exporters (including carmakers and producers of electronic products) depend predominately on imports. Few domestic suppliers exist.

The current account surplus was 4.4% of GDP in 2014 and will widen to 4.6% in 2015. Imports have risen as the reconstruction effort proceeds but higher remittances help to offset this increase.

Chart 3 Total Foreign Trade: 2009-2014

Source: Euromonitor International from national statistics/OECD/IMF

Economic Prospects

Real GDP should grow by 54.9% in 2015 after gains of 6.1% in 2014. Positive factors include lower commodity prices, higher public spending, and steady gains in both private consumption and exports. Risks include a prolonged slowdown in Japan and China - the Philippines' biggest trade partners.

Inflation should be 1.5% in 2015, down from 4.2% in 2014. The central bank's target range is 3-5%.

The real value of private final consumption rose by 3.8% in 2014 and an increase of 3.9% is expected in 2015. Remittances- which are crucial for consumer spending - rose by 6.4% in 2014 and the government predicts even stronger gains in 2015. Steady growth in employment and lower commodity prices also benefit consumption.

The Philippine economy suffers from yawning gaps in infrastructure. Chronic power shortages hold back the development of many industries. Delays in Manila's public-private partnership programme prevent implementation of many projects. Institutional investors complain that a handful of dynastic local family groups secure the bulk of PPP contracts. This is part of the reason why inflows of FDI are lower

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than in neighbouring countries.

Low interest rates and a reduction in down payment requirements are driving a boom in housing construction. According to government estimates the housing shortfall is expected to reach 5.8 million homes by 2016, up from 3.6 million in 2010. These pressures are helping to fuel the construction boom. By value, the construction and real estate sectors account for nearly a fifth of the economy - almost as much as manufacturing.

Unemployment was 6.6% in 2014 and it will drop to 6.3% in 2015. Underemployment, however, is nearly 20% and more than 40% of the employed work in the informal sector. The country must generate about 800,000 jobs annually to absorb new entrants. That task should become easier in 2016 when the ASEAN Economic Community (AEC) becomes a reality. The ILO estimates that the AEC could add an additional 3.1 million jobs to the Philippine economy, with many of those positions available for highly skilled workers.

Chart 4 Real GDP Growth: 2009-2015

Source: Euromonitor International from national statistics/Eurostat/OECD/UN/IMF

Note: Data for 2015 are forecast

Evaluation of Market Potential

The Philippine Development Plan calls for increased spending on infrastructure and the creation of one million new jobs. Priority industries singled out in the plan include agri-business, manufacturing, construction, information technology, business process management, logistics and tourism. In addition, a master plan for rehabilitating areas damaged by Typhoon Yolanda will boost reconstruction spending significantly. The plan covers 171 affected cities and has outlays of about US$4 billion. All this spending should ensure that real GDP will grow by around 6.0% per year in the medium term. A danger is that the government will not fully implement all these spending targets owing to bureaucratic obstacles.

The country's demographics should boost consumer spending in the medium term. Well-educated Filipinos between 25 and 34 years account for just 3% of the population but more than 20% of discretionary consumption - that is, spending on categories other than basic needs. By 2020, this particular demographic group is expected to contribute 50% of the country's discretionary expenditure.

Labour productivity has seen negligible gains for nearly three decades. The government needs to boost the growth rate of the capital stock to at least 10%

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(substantially higher than the current rate) - in order to raise productivity. Manila plans more than US$17 billion of investments in roads and airports to spur growth.

BUSINESS ENVIRONMENT

Manila has made the elimination of corruption a centrepiece of its administration. International economists estimate that officials collect less than 20% of the VAT taxes that are due. This is one reason why tax revenues amount to less than 14% of GDP - a much lower figure than in other Asian countries. Taxes will be raised over the next two years to meet new spending plans. Officials also intend to push collection rates up to 16-17% of GDP.

The government intends to promote more public-private partnerships to develop infrastructure. Additional reforms to improve the investment climate are planned. Manila currently has more than 60 potential projects in the pipeline, covering highways, railways, light rail mass transit, classrooms, and hospitals. Nine projects costing a total of US$2.9 billion were awarded in 2010-2014.

Businesses complain about delays in the implementation of key infrastructure projects and the costs of complying with regulations related to customs, trade, and labour markets. Small and medium-sized enterprises (SMEs) are underperforming. Too much of the economy is concentrated in the hands of larger groups (or government) while SMEs lack sufficient financing.

Table 1 Indicators of Business Environment: 2015

Ease of Doing Business Rank (out of 189)  95

   

Starting a Business   

Time (days)   34

Procedures (number)   16

Cost (% of income per capita)   16.6

   

Dealing with Construction Permits   

Time (days)  94

Procedures (number)  24

Cost (% of warehouse value)  1.2

   

Getting Electricity   

Time (days)  42

Procedures (number)  4

Cost (% of income per capita)   90.6

   

Registering Property   

Time (days)  35

Procedures (number)  9

Cost (% of property value)  4.3

   

Employing Workers   

Paid annual leave for a worker with 1 year of tenure (in working days)  5

   

Tax Rate    

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Source: Euromonitor International based on the World Bank

Note: Data is sourced from the World Bank's Doing Business 2015. Doing Business presents quantitative indicators on business regulations and the protection of property rights - and their effect on businesses, especially small and medium-size domestic firms. The data for all sets of indicators in Doing Business 2015 are from June 2013 until June 2014 (except for paying taxes data which refers to January-December 2013). Rankings are based on data sets across 189 countries. Note: Extent of disclosure index is a measure of liability for self-dealing by directors.

ENERGY

The Philippines has negligible reserves of oil and natural gas. Manila is pushing exploration in the South China Sea in areas claimed by China. The move threatens to provoke a clash with Beijing.

Total tax rate (% profit)  42.5

Labour tax and contributions (% of commercial profits)  8

Profit tax (% profit)  20.5

Other taxes (% profit)  14

Time (hours per year)  193

Payments (number per year)  36

VAT (%)  12

   

Exporting   

Documents to export (number)  6

Time to export (days)  15

Cost to export (US$ per container)  755

   

Importing   

Documents to import (number)  7

Time to import (days)  15

Cost to import (US$ per container)  915

   

Protecting Minority Investors   

Strength of minority investor protection index (0-10)  4.2

Extent of disclosure index (0-10)  2

   

Resolving Insolvency   

Time (years)  2.7

Cost (% of estate)  32

   

Getting Credit   

Strength of legal rights index (0-12)  3

   

Enforcing Contracts   

Time (days)  842

Cost (% of claim)  31

Procedures (number)  37

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Chart 5 Primary Consumption of Energy (% of total): 2014

Source: Euromonitor International from BP Amoco, BP Statistical Review of World Energy

SOCIETY

Population

Total population reached 100 million in 2014 - more than double the figure for 1980. The Philippines also has a much "younger" population than most other Asian countries. The median age is presently just 23.1 years - much lower than that of other countries in the region. In 2020, median age will be just 24.5 years

Fertility has been dropping but is still 3.0 births per female. This is far above replacement level and significantly greater than the regional average. In 2020, fertility is still expected to be around 2.8 births per female.

The Philippines is the second largest labour-exporting country in the world after Mexico. Approximately 7.5 million Filipinos, or almost 9% of the total population, are classified as "Overseas Filipino Workers" scattered in 182 foreign countries. This number does not include the estimated 3 million migrant workers who are undocumented and illegally working abroad.

Chart 6 Age Pyramid in 2014 and 2030

Source: Euromonitor International from national statistics/UN

Income and Expenditure

The Philippines' savings ratio has been very low for a number of years. In 2014, it amounted to 2.6% of disposable income and it will rise to 2.7% in 2015.

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Consumer expenditure per capita amounted to Ps91,061 (US$2,051) in 2014. In 2015, the indicator will grow by 2.2% in real terms. Education will be the fastest-growing consumer category in 2013-2030, driven by a soaring demand for private education.

Total consumer expenditure (in real terms) will rise by 4.0% in 2015. For the period 2013-2030, total consumer expenditure will grow at an average annual rate of 5.5%. It will increase by a cumulative value of 149% during that period. Total consumer expenditure will represent 71.7% of GDP in 2015 - a much larger share than the regional average. It will decline slightly in the remaining years of this decade.

Disposable income per capita totalled Ps93,945 (US$2,116) in 2014. In 2015, the indicator will grow by 2.2% in real terms.

During the period 2013-2030, total disposable income will increase by a cumulative 148% in real terms - growing at an average annual rate of 5.5%.

Income inequality remains high despite some improvements, resulting in a fragmented consumer market.

Chart 7 Per Capita Annual Disposable Income, Spending and Savings Ratio: 2009-2014

Source: Euromonitor International from national statistics/trade sources/OECD

Statistical Summary   2009 2010 2011 2012 2013 2014

Inflation (% change)

4.3 3.8 4.7 3.1 3.0 4.2

Exchange rate (per US$)

47.64 45.11 43.32 42.22 41.74 44.40

Lending rate 8.6 7.7 6.7 5.7 5.8 5.5

GDP (% real growth)

1.1 7.6 3.7 6.7 7.1 6.1

GDP (national currency 8,026,143.3 9,003,480.0 9,708,333.0 10,561,089.0 11,542,285.8 12,642,736.2

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millions)

GDP (US$ millions) 168,484.7 199,590.9 224,129.7 250,115.0 276,559.4 284,757.6

Birth rate (per '000) 25.3 25.0 24.8 24.6 24.4 24.2

Death rate (per '000) 6.0 6.0 6.0 6.0 6.0 6.0

No. of households ('000)

19,626.8 20,171.9 20,712.1 21,253.9 21,797.3 22,346.0

Total exports (US$ millions)

38,435.8 51,496.7 48,305.2 52,100.0 56,698.0 62,158.5

Total imports (US$ millions)

43,091.9 54,932.0 60,380.0 62,128.9 62,410.5 65,398.1

Tourism receipts (US$ millions)

2,330.0 2,630.0 3,152.0 3,483.9 4,282.9 -

Tourism spending (US$ millions)

2,698.0 3,416.0 3,646.0 4,076.6 4,723.5 -

Urban population ('000)

44,560.0 45,473.2 46,438.6 47,454.0 48,515.5 49,615.9

Urban population (%)

48.5 48.7 48.9 49.1 49.3 49.6

Population aged 0-14 (%)

35.6 35.2 34.8 34.4 34.1 33.8

Population aged 15-64 (%)

60.7 61.1 61.4 61.7 62.0 62.3

Population aged 65 (%)

3.7 3.7 3.8 3.8 3.9 4.0

Male population (%)

50.2 50.1 50.1 50.1 50.1 50.1

Female population (%)

49.8 49.9 49.9 49.9 49.9 49.9

Life expectancy male (years)

64.4 64.5 64.6 64.7 64.8 64.9

Life expectancy female (years)

71.1 71.2 71.3 71.5 71.6 71.8

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© Euromonitor International 2015

Imports and Exports

Infant mortality (deaths per '000 live births)

9.3 9.6 9.4 9.2 9.1 8.9

Adult literacy (%)

95.5 95.7 95.8 95.9 96.0 96.2

Major export destinations2014

Share (%) Major import sources2014

Share (%)

Exports (fob) to Asia Pacific 64.4 Imports (cif) from Asia

Pacific 59.0

Exports (fob) to North America 15.1 Imports (cif) from Europe 14.0

Exports (fob) to Europe 11.5 Imports (cif) from North America 9.2

Exports (fob) to Other Countries 4.0 Imports (cif) from Africa

and the Middle East 7.7

Exports (fob) to Australasia 2.0 Imports (cif) from Other

Countries 6.8

Exports (fob) to Africa and the Middle East 1.7 Imports (cif) from

Australasia 1.9

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